By Mark Hulbert
The bear market for U.S. stocks may have ended at its mid-June low. Or it may be only half over. And, if the bear market’s second half is still ahead of us, the biggest losses may or may not be yet to come. You can take my word for it.
The reason to point out these otherwise trivial truths is to counter the endless attempts on Wall Street to slice and dice the market data. Most of those attempts amount to little more than statistically suspect data mining, revealing more about the analyst doing the mining than about the market itself.
A number of recent posts on social media have argued that the worst of the bear market is yet to come. The implication is that bear market losses tend to be “back-end loaded,” with bear markets ending with a crescendo rather than a whimper.
There are two flaws with this line of thinking. First, the average on which it is based is calculated from a small sample, since (thankfully) there haven’t been many bear markets in U.S. history. So any conclusions must remain tentative at best.
Consider the 11 bear markets since 1980 in the bear-market calendar maintained by Ned Davis Research. In four of them, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.80% lost more in the first half than in the second. So while it’s true that the average bear market has its losses “back-end loaded,” it’s a low probability bet that this will continue to be true in the future.
The second, more basic flaw in this line of thinking is that it is based on an unspoken but nevertheless crucial premise — that the current bear market is still in its early innings. But that premise is precisely what we do not know.
It is true that, during the almost six-month decline from the market’s January high to its mid-June low, the Dow lost more in the second half than the first. Yet that tells us nothing about whether the bear market is over or still has a long ways to run.
Closer to the end
There is one aspect of this line of thinking that I do see as more significant: It’s indicative of a significant change in tone among analysts. In contrast to earlier analyses which essentially attempted to put an optimistic spin on the market’s losses, the emerging tone is more pessimistic. Rather than concluding that the worst is behind us, we’re now being told that the worst is ahead of us.
This shifting mood suggests we are further along on the five stages of bear market grief that I’ve discussed in recent columns. As recently as late July, I judged Wall Street’s mood to be in the third of those five stages — bargaining — with depression (stage 4) and acceptance (stage 5) yet to come. The pessimistic mood that is beginning to dominate social media is typical of stage 4 grief — which, from a contrarian point of view, means we’re closer to the bear market’s last gasp.
We’re not there yet, so it would be premature to celebrate this latest pessimistic turn. The market still has to face this emerging depression and then go through the acceptance stage. For these and other reasons, my hunch is that we’re in a bear market rally and the June lows will be broken.